The “Pop” Heard ‘Round the World

Will Somebody Please Turn Off the Bubble Machine?[courtesy Google Images]

debt-based monetary systemdebt

Despite the N.W.O.’s dependence on debt-based currency, it’s conceivable that, in the chaos that would follow if the current debt-based monetary system failed, the people of the world would “connect the dots,” realize that they’ve been robbed by the current debt-based monetary system and refuse to accept a newer debt-based monetary based on SDRs or some other debt instruments.

In a debt-based monetary system, the fundamental debts that we’re conditioned to value are the “promises to pay” (debt instruments, like bonds) issued primarily by the world’s governments but also by some major corporations.

Those governmental bonds (promises to pay) are used as collateral (assets; payments) by fractional reserve banks to privately issue loans worth 9 to 23 times the bonds’ face values. Used as fractional-reserve bank collateral, the governments’ bonds can “magically multiply” masses of new currency that will presumably stimulate the world’s economies until everyone is happy—or, at least, everyone thinks they’re happy.

• Most people have heard governments and central banks tell us that the entire monetary and economic system runs on public confidence. That’s old news. But I don’t recall anyone ever asking “confidence in what?” Likewise, I don’t recall any government or central bank telling us what, exactly, we must have confidence in.

We all agree that we must have confidence. But, confidence in what? The Dallas Cowboys? The Keystone Pipeline? Change You Can Believe In?

Using sovereign debt (bonds) as collateral to increase the amount of currency needed stimulate the economy is a Ponzi-scheme. Even so, it’s worked remarkably well for at least four decades. This scheme will continue to work brilliantly—so long as the people have confidence that their governments can and will redeem their “promises to pay” (bonds) by actually paying the debt owed, in full, on the bonds they’ve issued.

It’s becoming increasingly clear to me that the ultimate confidence that must be maintained is confidence in government’s ability and willingness to repay all of its debts by redeeming all of its bonds.

So long as the world has confidence that the US government can and will repay the official National Debt of $19 trillion, that the Japanese government can and will repay its public debt of 1.3 quadrillion yen, that China can and will repay its $30 trillion total debt, and the EU can and will repay its €12.5 trillion total governmental debts—then, the debt-based monetary system’s Ponzi scheme can continue to flourish and government can continue to “kick the can further down the road”.

Q: What, incidentally, is in the particular “can” that’s being kicked so enthusiastically?

A: The can contains the evidence and/or express confession that government can’t pay its debts.

Once government is forced to admit (or at least can no longer plausibly deny) that it can’t pay its debts, confidence in US bonds will disappear and the US (and probably global) economy(ies) will probably collapse.

I.e., consider the following hypothetical chain of events:

The public realizes that some significant percentage (probably most, maybe all) of the governments’ promises to pay (bonds) can’t and therefore won’t ever actually be paid in full by the government.

2. The public loses some or all of the fundamental confidence in governments’ ability to pay its debts;

3. That lost confidence in governments’ ability to pay their debts would cause the market value of many government bonds to fall;

4. Much of the perceived market value of bonds used as collateral by banks to justify creating and then lending trillions of dollars’ worth of digital loans would be extinguished;

5. The loss of market value of bonds held by banks as collateral could cause trillions of dollars’ worth of loans to be called in by the banks;

6. Calling in trillions of dollars in loans could cause some or all of the existing national and global economies to collapse;

7. There’d be very little real collateral (physical assets like gold, not paper debt-instruments) remaining for banks to use as collateral to begin to restore lending and rebuilding the collapsed economy; and then,

8. The perceived value of real, physical assets sufficiently liquid to use as an asset-based money (like gold and silver) could skyrocket. It’s conceivable that people could buy a decent car for one or two ounces of gold and a good house for ten.

Note that a chain of events similar to that listed above would be triggered by the loss ofpublicconfidence in governments’ ability to pay their debts (bonds).

• What could cause the public to lose confidence in governments’ ability to pay their debts?

Well, a small percentage of people might read articles like this one, consider the arguments presented and, if they agree with those arguments, begin to doubt government’s ability to pay its debts. If their doubt grows large enough, they’ll dump their paper debt-instruments and convert their wealth, earnings and/or saving into real assets, like gold.

But, the number of people who read, understand and agree with the arguments presented in articles like this one will be relatively few.

The vast majority of people won’t begin to understand, agree with, or try to apply arguments of the sort I’m presenting here until after the “stuff” has clearly begun to hit the fan.

How will the “stuff” begin to hit the fan?

It will begin whenever one or more of the four major economies (US, China, Japan and EU) begin to openly default on their paper debt-instruments (bonds), or fail to pay promised pensions, Social Security, entitlements and subsidies that people have heretofore relied on—or if government causes the currency to hyper-inflate (another means to avoid paying government debts).

In retrospect, future historians might even argue that the “sovereign” debt default began when subordinate governmental entities like Illinois, California, Detroit, Spain, Portugal or Greece began to default on their “sovereign” debts.

• This line of conjecture leads us to a central conclusion: It’s not the economy (stupid), or the US Dollar Index (stupid), the price of gold (stupid) or even the stock markets (stupid) that will signal and precipitate doomsday—it’ll be the bond markets.

If bond prices begin to fall significantly in any of the four major economies, that fall will reduce the market value of bonds held as collateral in major banks. That reduction in market value of the bonds/bank-collateral may cause some significant percentage of outstanding, fractional-reserve loans to be called in. If enough of those loans are called in, they’ll slow and perhaps collapse the particular national economy. The consequences might topple the entire global economy.

For example, suppose a major American bank held $1 billion in US bonds (mere promises to pay) and had used that $1 billion as collateral to lend $10 billion to private customers. Suppose the government defaulted on 40% of its bonds. The bank that had $1 billion in US bonds/collateral in its vaults would then have $600 million—only enough collateral to justify $6 billion of the current $10 billion in loans it had made to private customers.

In theory, the bank would be forced to call in $4 billion worth of current loans. If it did, investments would fail, businesses would be bankrupted, jobs would be lost, spending would fall. If something similar happened to enough other banks, the entire economy might sink into overt depression.

• Not all bank loans are based on using government bonds as collateral. Still, insofar as some bank loans are based on government bonds, it’s arguable that the entire, modern debt-based economy starts with government bonds (promises to pay) and depends on maintaining the public’s perceived value of those bonds. That “perceived value” is a function of public confidence in government’s ability to pay its debts—not just issue more “promises to pay”.

Must a chain of events similar to that outlined above necessarily take place?

Yes.

Why?

Because governments are so deep in debt they can’t possibly repay their existing debts in full. What can’t be paid, won’t be paid. Sooner or later, the governments must default. When they do, the public will awaken, lose confidence in government’s ability to repay its debts, and the price of bonds will fall.

Evidence?

Yes. The national debt has been growing steadily, almost exponentially, since government established a pure fiat currency in A.D. 1971. The steady growth of the National Debt is evidence that government hasn’t actually been able to pay all of its debt for, at least, four decades.

We all have moments in our lives when our debts exceed our income. Your wife is offered a great new job, but you’ll need another car to get her back and forth to the new job. Billy fell out of a tree and broke his arm. Sally needs braces. You go to the bank to borrow enough money to get you through a temporary difficult time. Then you pay off the loan in full. The fact that you’re paying the debt on time and in full is evidence that you are solvent and able to pay your debts.

But, suppose that before you were able to repay the car loan, you needed more money to pay for the cast on Billy’s arm. And then, you needed another loan to pay for Sally’s braces. As you applied for more and more loans, without having first repaid the pre-existing loans, would the bank begin to doubt your ability to repay any of your loans?

Of course they would.

Same thing with the National Debt. Because that debt has been constantly growing for most of the past 44 years, we have good reason to doubt the government will ever repay that debt. That constantly growing debt is evidence that the existing debt can’t be paid.

What is the market value of a US bond if the world knows that the US government can’t pay its debts?

Zee-ro.

• More, the true size (and therefore, true growth) of the National Debt has almost certainly been concealed.

I.e., while the Obama administration claims that the National Debt is roughly $19 trillion, some credible sources (John Williams at Shadowstats.com, economist Laurence Kotlikoff, and the Congressional Budget Office) estimate the true National Debt (including unfunded liabilities) to be at least $100 trillion—and probably over $200 trillion.

If the true National debt is $100 to $200 trillion, anyone who does the math can see that the National Debt will never be repaid in full.

Q. What is the market value of a $100,000 bond issued by a government that will be lucky to repay 20% of its debt and probably can’t pay even 10%?

A: Probably somewhere in the neighborhood of $5,000 to $15,000–maybe less. Maybe nothing at all.

When enough people do the math, public confidence in the government’s ability to pay its debts will fall. The value of bonds will drop. The use of bonds as collateral will decline. Bank loans will presumably be called in. If enough loans are called in, the economy will be impaired and could collapse.

The whole chain of events starts with a significant loss of public confidence in government’s ability to repay its debts/bonds. We don’t know when the process will clearly manifest. However, we do know that process is inevitable for the simple fact that it’s mathematically impossible for the government to repay most of its debts. Sooner or later everyone will recognize that truth, lose confidence in government’s ability to pay its debts and thereby trigger an economic depression.

• We don’t know when that chain of events may begin, but it’s arguable that it already has.

In September of A.D. 2012, Mother Jones magazine published an article entitled, “Is the Fed Really Buying Three-Quarters of All Treasury Debt?” In that article, Republican Party candidate for President, Mitt Romney, was quoted as saying,

“[T]he former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. I met with him, and he said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up.”

A year to two earlier, I recall reading about a “failed Treasury auction” somewhat similar that which John Whitehead and Mitt Romney had described: The US Treasury held one of its usual auctions to sell US bonds to private investors—but no one would offer to pay a price close to the bonds’ face value. So far as I know, that had never happened before. Previously, the US Treasury had little or no problem selling US Bonds to private investors at or near “full price”.

This time, however, private investors would not purchase US Bonds unless the price was dramatically reduced. That refusal to buy except at a significantly lower price was evidence that the private investors were losing confidence in the US government’s capacity to pay its debts. A falling bond price indicated that the public viewed the bonds as increasingly risky and unlikely to be repaid.

The government couldn’t risk allowing the private investors’ market to set a dramatically lower price for US bonds. The problem was not merely one of price. The problem was one of public confidence.

If private investors lowered the price of US bonds for sale at that auction, they’d cause the market price for US bonds (held as bank collateral) to fall around the world. Under fractional reserve banking, a general decline in the price of US bonds could cause banks to call in billions or even trillions of dollars in loans. The impact on the US and global economies would be negative and might be disastrous. The real point, I suspect, was that significantly lower bond prices would signal a loss of much of the public confidence required to keep the whole Ponzi Scheme running.

That would truly be a “failed Treasury auction” of historic proportions.

What did the US Treasury do?

Rather than allow evidence to be created on the public record of a “failed Treasury auction,” the Treasury Department closed the auction without selling a single bond. They prevented even a single sale that would help prove that the free market price for US bonds—and public confidence in government’s ability to pay its bills—had fallen significantly.

That was a “failed Treasury auction” of the sort that John Whitehead and Mitt Romney had described. However, because Treasury closed the auction rather than allow one sale that would be evidence of that failure, the result was not catastrophic.

Instead, for the next few years, whenever the US Treasury held an “auction,” the Federal Reserve intervened to not only buy most of the US bonds that were being sold, but also to pay “full price” for those bonds. Figuratively speaking, the Fed was over-paying $900 for a $1,000 US bond in order to conceal the fact that the private investors’ markets might not pay even $700 for the same bond.

Treasury auctions were, in fact, failing. The free market price of US bonds was falling. But the Fed concealed evidence of that failure by paying more than the free-market price. Thanks to the Fed, Treasury auctions looked like “business as usual” and US bonds appeared to retain their value.

By buying US bonds and paying “full price,” the Federal Reserve maintained the illusion of steady value in US bonds. So long as that illusion of value (redeemability) remained, the public retained confidence that the government could repay its debts in full. Unfortunately, that confidence is unfounded since it’s based on the Fed’s manipulation of the bond markets rather than honest, free-market prices for bonds.

• Thanks to Fed’s intervention in the sale of US bonds:

1) US bonds are overpriced to an unknown but significant degree; and,

2) the bond market has become a massive “bubble”—maybe the mother of all bubbles.

If the bond market bubble “pops,” it’ll be the “pop heard round the world”.

Why? Because, as I’ve illustrated in this article, bonds in general and US bonds in particular, may the cornerstone on which much of the US and global economies are based. If the US bond market “pops,” the price of US bonds could easily fall by 20%–and could fall by 80% or even 90%. In the event of a “pop,” every pension fund holding US bonds would see its capital reduced. Every retiree whose income relies on bonds would see their income reduced. Every investor who’s stored his wealth in US bonds could lose much of his wealth. Banks that rely on US bonds for collateral might be forced to call in enough loans to tip an already fragile economy into an overt depression.

Given the seeming significance of US bond prices holding fairly steady, you can see why the Federal Reserve is so skittish about raising interest rates by a mere 0.25%. Fundamental rule: If interest rates rise, bond prices fall. Would a 0.25% rise in interest rates cause enough of a fall in US bond prices to “pop” the bubble? Probably not.

But who can say for sure? In an economy as fragile as ours, a 0.25% rise in interest rates might be just the needle needed to cause the “pop heard round the world”.

• Lesson?

If we want reliable evidence as to what’s happened, happening or about to happen to the US or global economies and markets, we’d best start following the bond markets.